One of our founders was recently approached by an investor interested in investing in their company. The company doesn’t need money right now and can do a lot more with its current cash to become a bigger and better company over the next few months.
When a startup receives investor interest outside of a formal fundraising cycle, it can be tempting for the entrepreneur to act on the interest. This is especially true in markets like Turkey where funding for startups is a scarce resource.
However, there are two problems with moving forward with fundraising discussions with a single investor outside of when you decide to launch a formal fundraising process.
The first is that you don’t need the cash. You therefore leave money on the table by foregoing the higher valuation that you would secure if you used your existing cash to become a bigger and better company. I wrote about how you want to start fundraising with 6 to 12 months of runway left in an earlier post.
The second is that, if you move forward with a single investor, you’re going to have one bidder at best at the end of your talks. And the number of bidders you have at the table is the single most important factor for your startup’s valuation. I wrote about this in an earlier post.
These two reasons shouldn’t be read as a recommendation to optimize for valuation. At the end of a formal fundraising process which you launch when you have identified a need for cash in the upcoming 6 to 12 months, you should prioritize the identity and your personal fit with each potential investor over small differences in the valuations that different investors may be offering.
You should also build a relationship with potential investors before launching a formal fundraising process. This means meeting them, sharing your vision, and keeping them updated on the company’s progress through regular check-ins. This will help you find the right partner and reach a fast conclusion when you begin to fundraise.
However, in each of these discussions, you should be clear that you’re currently not looking for money. You know the right time to raise money for your company, and you want to be talking to multiple investors when that time arrives.
Also published on Medium.